Update: January 12th, 2013: Flood of Q4 ’12 Earnings to Start This Week

Per ThomsonReuters “This Week in Earnings” the “forward 4-quarter” earnings estimate for the the SP 500 as of January 11th was $113.31, down from $113.88 last week, but still a record high estimate for the key benchmark, and above the high of $112.26 from early October.

The S&P 500 closed Friday, Jan 11th at 1,472.05, just shy of the mid-September multi-year high of 1,474, and with a 13(x) multiple on the forward estimate.

With the flood of Q4 ’12 earnings scheduled to start this week, the 3rd quarter results (now final) show that the SP 500 earnings grew 0.1% year-over-year (y/y), while SP 500 revenues fell -0.8% y/y.

4th quarter, 2012 earnings are now expected to grow 1.9% year-over-year, while revenue growth is expected to grow 1.8%.

While these q3 ’12 actuals, and q4 ’12 estimates seem pretty paltry, we feel that these results represent the bottom of the earnings cycle for the SP 500. We expect earnings and revenue growth to gradually improve in q4 ’12, and as we move through 2013.

2013 SP 500 earnings growth estimates (starting with q3 ’12)

q4 ’13 + 17.7% (est)

q3 ’13 + 10.7% (est)

q2 ’13 +7.7% (est)

q1 ’13 +3.7% (est)

q4 ’12 +1.9%,  revenue growth +1.8% (est)

q3 12 +0.1%, revenue growth -0.8%

There is still downward pressure on the forward estimates in terms of revisions, but the “absolute” (i.e. dollar) estimates are still expected to show slow growth through calendar 2013.

Do I expect the 4th quarter, 2013 earnings to come in at +17.7% and prove today’s estimate to be remarkably prescient ? Heck no! But given the q3 and q4 ’12’s numbers (and the easy comparisons), I’ll make the prediction right now that I fully expect q3 and q4 ’13’s earnings growth to be at least double-digits, when we get the actual results in about nine months.

Full year 2013 earnings growth is currently expected at +10.6%. I’d say we have a better-than-even chance of achieving that in full-year 2013, and that earnings growth for 2013 will be “back-end loaded” for the year.

Forward 4-quarter estimates now growing again:

In investing, correlation is not always causality, but when we look at (perhaps) one reason the stock market found a bottom in late June, early July, 2012 we immediately study the earnings data for clues. Since we have tracked earnings data for more than a decade, and tracked that “forward 4-quarter” estimate, we found that in early August, the forward SP 500 earnings estimate started showing year-over-year growth after being stagnant for almost a year.

In this link from October 13th, 2012, we detail how the forward 4-quarter estimate had started to grow once again. We pick up where our prior article left off, on October 12th, and detail the growth in the forward earnings estimate since:

1/11/13 – $113.31 +5.67%

1/4/13 – $113.88 +5.45%

12/28/12 – $108.83 +5.05%

12/14/12 – $109.09 +4.85%

11/30/12 – $109.42 +4.67%

11/16/12 – $109.61  +4.62%

10/26/12 – $111.14 +5.30%

10/19/12 – $111.85 +5.72%

10/12/12 – $111.85 +4.91%

This is an important metric which rarely gets discussed at all by the Street: what it tells us is what the SP 500 consensus forward estimate is doing relative to the estimate of 52 weeks prior.

When I look back on the metric in the 2000’s, the y/y growth of the forward estimate peaked at 16% in late 2005 – 2006, and then started to slowly show slower and slower y/y growth. Because I’m an idiot, and thought that it would eventually resume its upward trend, I ignored the deteriorating growth rate – until it was too late and the Great Recession of 2008 ensued.

The point being that – as long as that SP 500 forward 4-quarter” estimate continues to show y/y growth – and gradually improving growth at that, the SP 500 should maintain its upward bias.

Are you asleep yet ? (Ok, just wait…)

Asset Class / Sector / Security specifics:

  • With the SP 500 way overbought, AAII investor sentiment came out last week and found that bullish sentiment rose to 46%, from 38.7% the week prior. The SP 500 needs at least a 2% – 3% correction to restore some balance to the trend. With earnings starting this week in earnest, and it being expiration week, don’t be surprised if we see a correction shortly. The pundits will cry “earnings disappointment” but they are clueless anyway. We need a pullback here to keep it healthy and with the SP 500 near mid September high, it seems like a good place.
  • We bought some SH. Still long SH.
  • This is a big week for financials to report quarterly results. On Wednesday alone, according to the companies scheduled to report by ThomsonReuters, 8 of the 9 are banks. In total, 20 banks / finance/ brokers are scheduled to report, and that only counts those listed by Thomson. In calendar 2013, “Financials” are expected to grow earnings 17.8%, up from 16.4% last week, so the financial sector’s revisions continue to flash positive. If you’ve read this weekly blog, we were on this starting last fall, and all the way back to the summer, saying financials had started to look better in terms of earnings growth and revisions.
  •  Lennar (LEN) reports their fiscal 4th quarter earnings on Tuesday, Jan 15th. The stock had a monstrous 2012, up 250%. here is our earnings preview published on Seeking Alpha last week. The homebuilders will start to lap tougher comp’s in 2013, but I also wrote a month ago I thought the first leg of the homebuilder run was over. Since then, LEN has traded from $38 to $41. Even if these stocks would flat-line for a spell, it would give buyers a chance for better entry prices. The PEG valuation looks enticing for LEN. The other valuation metrics are scary.
  • Basic Materials had the best y/y earnings forecast coming into 2013, but Alcoa (AA) might have cost that sector the top slot after reporting Tuesday night. The 2013 earnings estimate continues to compress, which is probably why the Basic Mat sector estimate was revised lower this past week. (Telecom is now in first place in terms of expected sector earnings growth rate for 2013, followed by Basic Mat.)

Here is the trend in Alcoa’s 2013 earnings estimate over the past 5 quarters:

q4 ’12 – $0.62

q3 ’12 – $0.67

q2 ’12 – $0.86

q1 ’12 – $0.95

q4 ’11 – $0.98

This has been our single worst position over the last 4 years. We even managed to get out of Best Buy a few times with a trading gain.

  •  The big news this week was the first inflows into equity mutual funds in quite a while. Here is Josh Brown’s article detailing the positive feedback loop, as tweeted by Norm Conley . Note though the largest fund flows came in right before the wheels came off the cart in Sept ’07. That date is significant: the Fed had just started easing monetary policy, and the banks were in the process of taking their first mortgage write-downs from the mortgage crisis.
  • Lending is starting to recover. Here is a graph by Norm Conley of JAGlynn on the rebound.
  • Schwab (SCHW) reports this week: here is our earnings preview. There is at least $0.40 – $0.50 of additional eps baked into Schwab’s fee waivers. If the stock breaks out here, then the market is going much higher, but the stock needs to clear $15.58 – $15.68 on heavy volume, and I would speculate it would only do that if the economy turned out to be much stronger-than-expected, SP 500 earnings turned out to be much stronger-than-expected, and the Fed was within 6 – 9 months of raising short-term rates. Schwab is the best on-the-run monetary policy tell you have outside of fed funds futures. (long SCHW)
  • Ford (F) had a big week, up over 3%, on a doubling of the small dividend and a few upgrades. The stock looks overbought here. (Long F)
  • Our worst trade in 2012: selling Google (GOOG) at $580 in late July, and watching it trade to $770 in just two months following. Best trade in 2012, waiting to buy Facebook (FB) under $20, and then doing so.
  • IBM had a tough 4th quarter, and is still off its $210 all-time high. The stock put in a series of highs near $210 – $211 in both April and October, and then sold off hard in October after reporting earnings. Earnings estimates have remained pretty constant for 2013 and 2014 following the October report. I think a lot of IBM’s trading action will be the result of 2013 guidance, which we hear next week. Expect management to be conservative, but generally positive. (Long IBM)

Nothing much has changed from our long-term perspective:

1) We remain tilted towards equities in our balanced accounts, within the 60/40, 70/30 traditional split

2.) We remain overweight financials, industrials and technology. Apple looks like it is basing, but the company is lapping a huge December quarter from last year. The earnings estimates on Apple (AAPL) are somewhat deceptive, with a positive bias. Check back here early next week, and we’ll tell you why.

We are waiting on a pullback in financials to increase our weighting to the sector. Financials are one way to play the housing recovery, with a cheaper valuation. Industrials will benefit from a resurgent China, Western Europe and Japan.

Thanks for reading and stopping by!

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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